EXPORT ORIENTED UNITS

Service Tax - Central Excise and Service Tax Audit Manual - CBEC - 07 - CHAPTER 7 7.1 SERVICE TAX: There is no general exemption to EOU / EHTP /STP / BTP units from payment of service tax. There are no special provisions governing payment of service tax by these units either. 7.2 CENTRAL EXCISE: Section 3 of the Central Excise Act makes a special dispensation for EOUs and provides that goods manufactured in such units are liable to excise duty equivalent to the aggregate of all customs duties, w .....

demands of customs duty and those that involve recovery of central excise duty. 7.3 Owing to options available to such units under the Foreign Trade Policy and the nature of goods manufactured, each unit is likely to have a unique pattern of inflow (of duty free or exempted goods) and outflow (of exempted or dutiable goods). To give an example, some units may procure capital goods indigenously claiming excise duty exemption while others may import them free of customs duty. In addition, EOUs ar .....

hrow up risks owing to substitution of imported raw materials, their diversion into DTA and inflation of wastages and rejects - factors unique to EOUs. Depending on the nature of goods being manufactured, auditors may have to use suitable indicators of risk on account of such factors. 7.4 The auditor has to lay special emphasis on verification of documents, registers and returns that are mentioned or filed either to the Customs authorities or to the any other authority. Sales to DTA also constit .....

oval; ii. Whether the unit has the capacity to achieve the volume of production indicated in the LOP or whether a LOP has been obtained for quantities far in excess. iii. Whether benefits of Customs/ Central Excise exemptions have been availed only on admissible items as listed in the notifications; whether the goods imported/ indigenously procured duty free are required and conform to the declaration submitted to the Development Commissioner and are actually used for the manufacture /processing .....

; vi. Whether any goods, procured free of duty, are removed unauthorisedly, i.e., they are transferred/ sold/sent for job-work/ supplied to other units without permission of the Assistant Commissioner/Deputy Commissioner or wherever necessary the Development Commissioner. vii. Whether permission for DTA sales has been obtained and if so whether the details of foreign exchange earnings and utilisation, furnished to the Development Commissioner tally with the records of the unit; and whether the c .....

invoicing the value or mis-classification. xi. Whether the facility of partial conversion of DTA unit into EOU is being misused. Such misuse is possible, firstly, when the duty free capital goods or raw materials etc. are used by a non-entitled unit i.e. the DTA unit. Secondly, duty free imported goods may be diverted to the DTA unit and also the production of the DTA is shown as the production of EOU for obtaining concession which can easily be done especially, when two units share common facil .....

and the material has reached the actual destination (Sometimes, EOU furnishes copies of only Shipping Bills as filed, as proof of export even though the goods are not exported under such shipping bills. Careful scrutiny of shipping bills will indicate that no goods have been exported and only shipping bill has been filed {and later withdrawn in some cases).It is advised to verify as to whether mate s receipts are available in respect of each of the exports made by the unit; xiv. Whether export o .....

as been availed in accordance with the CENVAT Credit Rules, 2004. 7.6 Tips for conduct of verification: Certain useful tips to conduct audit verification in case of duty free imports, indigenous procurements, sub-contracting etc. are discussed below. These guidelines are only for the general convenience of the officers. For actual application, the relevant notifications and Paras of Foreign Trade policy in vogue should be strictly referred to. 7.6.1 Duty free Imports EOUs can import goods requir .....

ate internal systems in place, for this purpose. In the event of violation of any of the conditions of exemption, customs duty is recoverable on the goods in question. The value of such goods should be ascertained under Section 14 of the Customs Act, 1962. It is important to note that the exemption would continue to apply to goods imported or procured under this exemption, even when they are used for the manufacture of goods that are cleared into the DTA as per the permission of the Competent Au .....

est should be demanded. iii.Similarly, in case of other goods check whether they have been used for intended purposes or re-exported within three years or extended period. iv. Check whether the goods produced or packaged have been exported within a period of one year or extended period from the date of import/ procurement. v. Check unused goods (including empty cones, bobbins or containers suitable for repeated use) have been exported or cleared for home consumption within a period of one year o .....

manufacture of the finished (export) product is broadly the same as that imported or procured free of duty. viii. Check whether the goods taken out of the unit for test, repairs, replacement, calibration, job-work etc., as well as the waste, scrap or remnants are either returned or duly accounted for. ix. Check appropriate customs duty has been recovered on such capital goods and other goods (except used packaging materials) that have been allowed to be taken outside the unit, to any other place .....

e conditions prescribed. Thus, the same checks, with suitable changes, should be applied in respect of capital goods, raw materials and other goods on which excise duty exemption is claimed. 7.6.3 Subcontracting, Job-work: There are two situations, i.e. i) Sub contract part of their production process and ii) Sub contract part of the product. In both the cases, check whether the procedure prescribed by Board from time to time is being followed by the unit. 7.6.4 Inter unit transfer (From EOU to .....

issued demanding duty. b) Check as per Para 6.10 of Foreign Trade Policy read with Para 6.19 of Hand Book of Procedures, Appendix 14I of Handbook of procedures are in order. 7.6.6 DTA sales: Notification No.24/2003-CE exempts all excisable goods manufactured in a 100% EOU from the whole of excise duty [basic, additional (in lieu of sales tax) & additional (textiles and textile articles)]. This exemption is applicable so long as the goods are not brought to any other place in India. In other .....

r exclusively out of indigenous raw materials. Concerned S.No. in the Table annexed to the relevant notification should invariably be referred to while verifying the applicability of these rates. a) Check whether DTA entitlement is in force and is adequate to cover the DTA sales. Also check whether these clearances are in accordance with the provisions of sub-paragraph (a), (b), (d) and (h) of paragraph 6.8 of EXIM Policy. b) Check whether DTA sales of rejects are within the limit of 5% of Free .....